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In Focus

Posted at: Dec 18, 2017, 12:23 AM; last updated: Dec 18, 2017, 12:23 AM (IST)

Soft currency, hard reality

Bitcoins have a definite advantage over the prevalent fiat-currencies. Transactions are faster and accurate, with nominal charges. The drawback is that they are unregulated and decentralised. RACHNA SINGH says that the technology that powers bitcoins is here to stay.
Maninder, a passionate libertarian, purchased her first bitcoin right after demonetisation. Her logic was simple. If the legality of a currency was dependent on whimsical policies, she wanted no part of it. 

Vanika who was visiting Harare on a corporate assignment found herself stranded when the Mugabe coup happened. Robbed of her money and credit card, she somehow managed to escape the strife-torn city and reach neighbouring Lusaka (Zambia) by paying in bitcoin. She is now a hardcore bitcoin fan. 

The cryptocurrency, bitcoin, caught the fancy of the global community after its valuation surged past $17,000 this month. There were credible reports that the bitcoin value had managed to exceed the wealth of billionaires like Warren Buffett and the GDP of countries like New Zealand. There are predictions that this cryptocurrency may reach an astounding $40,000 to $60,000 in the near future. 

Making of a bitcoin

So what is a bitcoin? It is a digital currency generated through intensive mathematical computations on the computer network. In more technical terms, it can also be defined as an open-source peer-to-peer blockchain technology based cryptocurrency that can be transacted on the internet without a bank or a middleman.

Angad Bedi, a computer specialist explained that blockchain technology  was a data structure that creates a shared digital ledger of transaction. No one knows for certain, but it is widely believed that one 'Satoshi Nakamoto' was the founding father of this currency in 2009.

The last few years have seen a mainstream acceptance of bitcoins. E-commerce sites like Reddit, Wordpress, Overstock, Amazon accept bitcoins. Bitcoins also trade on specific exchanges like Bitstamp, Coinbase, Bitfinex, Cryptsy etc. ATMs that exchange bitcoins for dollars have been set up in cities like San Diego and Vancouver.  

Currency charisma

Transparency and anonymity are the strengths behind the bitcoin charisma. Each bitcoin blockchain has three parts — identifying address, called the 'public key'; a 'ledger' that lists the history of all those who have transacted in bitcoins; and the 'private key', which is a sophisticated digital signature that captures and confirms each transaction in a bitcoin file. 

The digital signature is unique to each individual user and his personal bitcoin wallet. The signature key tracks, tags and publicly discloses every transaction. So, while every bitcoin records the digital address of the bitcoin wallet it touches, the bitcoin system does not record the names of the individuals who own wallets. Therefore, it has become exceedingly attractive to privacy advocates, security adherents and libertarians.

The fact that bitcoins are regulated by a free market economy and not the whims of a government or any central bank adds to its virtual charm. Non-existent transaction charges and immunity from global and domestic policy changes are undoubtedly the cherry on the cake. Bitcoins are also being used as a hedge against inflation.

The recent buzz

Of late, the bitcoin seems to be scaling unprecedented heights. Several global events in the recent past have triggered the switch on the bitcoin powerhouse. The recent trend of selling bitcoins through Initial Coin Offering (ICOs) to source start-ups showed the bitcoins in an extremely attractive light. The global bitcoin fraternity is also upbeat that the Securities Exchange Commission of the US would relent and approve the Winklevoss Bitcoin Trust ETF. The October 25 Bitcoin Gold Fork that allowed a free gold bitcoin to every user holding bitcoins added to the bitcoin sale pitch.

What has added a fresh shine to this non-fiat currency is the news that that Chicago Board of Options Exchange will begin trading in bitcoin futures in December. Chicago Mercantile exchange, the world's largest exchange in derivatives, also plans to begin trading in bitcoin futures by last week of December. NASDAQ is contemplating a similar trading from January 2018. Goldman Sachs, has divulged that it would trade in bitcoin futures on behalf of its clients. No wonder the bitcoin is on a roll. 

Spoke in the wheel

Bitcoins are regarded by some as illegal because they have often been used to purchase under-the-radar drugs, arsenal, pornography material etc from e-havens like 'Silk Road' and 'Black market reloaded'. In the domestic market they have been known to launder black money. This is, perhaps the reason why bitcoins are not accepted as a legal tender in most countries. 

In fact, countries like Bolivia, Ecuador, Kyrgyzstan and Bangladesh have banned bitcoins. Other countries have a somewhat ambivalent approach. The European Union imposes VAT/GST on bitcoin payments for goods and services rendered. Canada regulates some  bitcoin business models such as exchanges and ATMs. The US Federal authorities treat bitcoins as property for purposes of taxation. India, like most countries with a significant number of bitcoin users, allows private use of bitcoins. Although, it is not an accepted legal tender and RBI continues to warn investors against the pitfalls of transacting in this non-fiat currency.

Another glaring problem with this currency is that there is no mechanism to regulate bitcoin transactions. So an aggrieved party has no redressal forum to run to, if one is shortchanged  or becomes the victim of a bitcoin hack or a heist. A troubled bitcoin investor revealed that he lost his password, and consequently lost access to his bitcoin wallet.

The bubble

The extreme volatility of this currency also sets off warning bells. The no-holds-barred rise also means that when bitcoin plummets there will be no stopping its headlong plunge. Vineet, a Delhi based banker mused aloud that "no sane person can risk selling an asset like a house or a car for bitcoins as it may devalue without warning". After all, he reasons, this currency has no intrinsic value and also holds no promise of an assured cash flow in the future. What is cause for concern is that this newbie asset's sudden price escalation is very much reminiscent of the dotcom bubble of 1990s. The bitcoin crash is definitely imminent. Any curveball could trigger the bitcoin bust. 

Way forward

The bitcoin experts and policy makers need to rise above the bitcoin din and prediction galore and put on their thinking caps. The world needs a unified global digital currency. The first step would naturally be minting of a domestic fiat cryptocurrency by the various countries. 

The good news is that some countries are already experimenting with this notion. The Central Bank of Canada is already working with the digital version of a Canadian dollar called CADcoin. The Central Bank of Netherlands is making similar forays. Not to be left behind, the research arm of RBI, released a white paper entitled 'applications of blockchain technology to banking and financial sector In India' in January this year, recommending adoption of blockchain technology to mint digital currency and also closely regulate monetary transactions. A successful study on use of blockchain technology with National Payments Corporation was also undertaken. Possibly the country may have 'Bharatcoin' or 'Lakshmi' as its cryptocurrency in the future. 

A unified global consensus and regulatory mechanism would make this cryptocurrency a lot safer and acceptable than the different fiat currencies of the day. If a unified European currency (euro) could happen, a global cryptocurrency is not beyond the realm of possibility. 

— The writer is a senior officer of the Indian Revenue Service and an author.

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